To assuage the central bank’s concerns, Indiabulls – led by Sameer Gehlaut, an aggressive, first-generation entrepreneur– is even willing to divest its real estate development arm altogether. It has already reached an agreement to sell its real estate assets comprising commercial and residential projects in markets like Mumbai, Chennai and the National Capital Region to Bengaluru-based property developer Embassy Group and private equity firm Blackstone. Furthermore, IHFL, which has made a killing in the past by lending to real estate developers by way of project finance, will also cease lending to such projects, if it can convert to a bank, and focus on ensuring repayments to water down the existing book.

If the IHFL-LVB deal goes through then Gehlaut will become the principal promoter of the bank with a stake of around 19.7% in the combined entity. RBI’s regulations prescribe that promoters of a bank need to eventually, over time, bring their stake down to below 15%. Gehlaut is even willing to bring down his stake to below 15% in the merged entity immediately.

Also, given the central bank’s hesitation of late towards promoters continuing as executive heads of banks, Gehlaut is ready to give up his executive position and remain a non-executive director (perhaps part-time chairman) on the board. Gehlaut, currently, is the executive chairman at IHFL. Apart from the compensation he draws as executive chairman, he earns around ₹400 crore annually by way of dividend due to his 21.5% stake in the company. Becoming the non-executive promoter of a bank that will be directly supervised by RBI might substantially curtail his power, as well as the dividend and compensation that Gehlaut gets, since the RBI has stringent policies in these matters.

Indiabulls Lakshmi Vilas Bank, as the combined entity is proposed to be called will be the eighth largest bank in the country by account of a consolidated balance sheet size of around ₹1.5 lakh crore. Ajit Mittal, executive director, IHFL, says that the proposed bank will focus on lending to small and medium enterprises (SMEs) that have found it difficult to access growth capital from traditional banks in the past owing to inadequate means of assessing their creditworthiness. Mittal says Indiabulls has been lending to SMEs against property successfully and will utilise that expertise to grow the SME book at the bank. IHFL also prides itself on its expertise in debt recovery and plans to use its capabilities to help the bank recover money from existing defaulters.

But the merger isn’t a done deal yet and everybody is keenly watching the RBI’s stance in this regard, as that is likely to set a precedent for the future. Since the RBI framed clear rules in this regard in 2016, two such deals involving a bank and an NBFC have received the regulator’s blessings. IndusInd Bank acquired Bharat Financial Inclusion earlier this year; and Bandhan Bank acquisition of Gruh Finance is work-in-progress.

However, the central bank – led by governor Shaktikanta Das – may find itself in a tricky spot vis-à-vis this merger, the proposal for which is at its doorstep. On one hand, allowing the merger to go through may help resurrect LVB. On the other hand, this would mean allowing IHFL to become a bank which could go against its own principles of not allowing entities with exposure to real estate enter mainstream banking. IHFL, in particular is an entity that had earlier unsuccessfully applied for a licence. So that would play on the regulator’s mind as well. Moreover, IHFL has been in the eye of a controversy recently due to allegations of corporate misgovernance against Gehlaut. Even as IHFL’s stock price plummeted, the allegations were later withdrawn by the complainant.

There is an emerging line of thought which says that central banks should get systematically important NBFCs to convert to banks in larger public interest. This will bring them under the RBI’s direct supervision and help keep a check on them. Who knows? It might also prevent an ‘IL&FS-esque’ financial misadventure and crisis in the future.

Bharat Financial Inclusion

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What’s next for NBFCs after the music has stopped?